tesco annual report 2011

Tesco PLC

Annual R

eport and Financial Statements 2011

Tesco PLCTesco HouseDelamare RoadCheshuntHertfordshire EN8 9SL

http://ar2011.tescoplc.com

OvERviEw

2 Financial highlights3 Chairmans statement 4 Chief Executives review 6 Our vision

BuSiNESS REviEw*

14 Our business 16 Growing the UK core 22 To be an outstanding

international retailer26 To be strong in everything we sell30 Growing retail services34 Community at the heart of

what we do38 Building brands42 Building our team 46 Property developing and

building for customers48 Key performance indicators50 Group financials51 Principal risks and uncertainties58 General information

GOvERNaNCE

60 Our Board of Directors* 62 Directors report on corporate

governance* 74 Directors remuneration report

FiNaNCiaL STaTEmENTS

92 Statement of Directors responsibilities

93 Independent auditors report to the members of Tesco PLC

94 Group income statement 95 Group statement of

comprehensive income 96 Group balance sheet 97 Group statement of changes

in equity 98 Group cash flow statement 98 Reconciliation of net cash flow

to movement in net debt note 99 Notes to the Group financial

statements 146 Five year record 147 Tesco PLC Parent Company

balance sheet 148 Notes to the Parent Company

financial statements 156 Independent auditors report

to the members of Tesco PLC IBC Financial calendar

* These sections form the Report of the Directors

Contents

Financial year end 2010/11 26 February 2011Final ex-dividend date 27 April 2011Record date 3 May 2011Q1 Interim Management Statement June 2011Annual General Meeting 1 July 2011Final dividend payment date 8 July 2011Half-year end 2011/12 27 August 2011Interim Results October 2011Q3 Interim Management Statement December 2011Christmas and New Year Trading Statement January 2012Financial year ended 2011/12 25 February 2012

Please note that dates are provisional and subject to change.

finanCial statements

Headingfinancial calendar

Revenue* GDP growth (m) Stores Employees (% real change pa)

south Korea 4,984 354 23,131 6.1thailand 2,844 782 38,395 7.9China 1,141 105 27,096 10.3malaysia 794 38 11,023 7.2Japan 476 140 4,367 4.0

Us

Revenue*

495mNumber of stores

164Employees

4,134Selling space (sq ft, % of Group)

1.7m sq ft1.6%

UK

Revenue*

40,766mNumber of stores

2,715Employees


36.7m sq ft35.4%

europe

Revenue*


1,082Employees


30.2m sq ft29.2%

tesco Bank

Revenue*

919mEmployees

1,274

india

in india, we have an exclusive franchise agreement with Trent, the retail arm of the Tata Group. we are supporting the development of their Star Bazaar format.

asia

Revenue*


1,419Employees


35.0m sq ft33.8%

Revenue* GDP growth (m) Stores Employees (% real change pa)

Republic of ireland 2,332 130 13,344 -0.8 Poland 2,156 371 24,932 3.8Hungary 1,649 205 21,157 1.2Czech Republic 1,355 158 12,812 2.3slovakia 996 97 9,105 4.0turkey 700 121 8,038 8.1

Creating value forcustomers across allour businesses

Employee figures represent the average number of employees during the year

230 employees across asia and Europe work in locations other than those listed

* Revenues are sales excluding vaT and exclude the impact of iFRiC 13 (customer loyalty schemes)

Revenue for Europe includes France; revenue for asia includes india

GDP growth: Economist intelligence unit

tesco around the world

oVeRVieW

Designed and produced by C O N R A N D E S I G N G R O U P

This Report is printed on Revive 100 Pure White Silk paper and has been independently certified on behalf of the Forest Stewardship Council (FSC). The inks used are all vegetable oil based.

Printed at Pureprint Group Ltd, ISO14001, FSC certified and CarbonNeutral

Tesco PLC

Annual R

eport and Financial Statements 2011

Tesco PLCTesco HouseDelamare RoadCheshuntHertfordshire EN8 9SL

http://ar2011.tescoplc.com

OvERviEw

2 Financial highlights3 Chairmans statement 4 Chief Executives review 6 Our vision

BuSiNESS REviEw*

14 Our business 16 Growing the UK core 22 To be an outstanding

international retailer26 To be strong in everything we sell30 Growing retail services34 Community at the heart of

what we do38 Building brands42 Building our team 46 Property developing and

building for customers48 Key performance indicators50 Group financials51 Principal risks and uncertainties58 General information

GOvERNaNCE

60 Our Board of Directors* 62 Directors report on corporate

governance* 74 Directors remuneration report

FiNaNCiaL STaTEmENTS

92 Statement of Directors responsibilities

93 Independent auditors report to the members of Tesco PLC

94 Group income statement 95 Group statement of

comprehensive income 96 Group balance sheet 97 Group statement of changes

in equity 98 Group cash flow statement 98 Reconciliation of net cash flow

to movement in net debt note 99 Notes to the Group financial

statements 146 Five year record 147 Tesco PLC Parent Company

balance sheet 148 Notes to the Parent Company

financial statements 156 Independent auditors report

to the members of Tesco PLC IBC Financial calendar

* These sections form the Report of the Directors

Contents

Our Values sit at the heart of our business. They are:

No one tries harder for customers; and

Treat people how we like to be treated.

Our core purpose is to create value for customers to earn their lifetime loyalty.

+8.1%Group sales (including VAT)

+12.3%Underlying profit before tax

+11.3%Group profit before tax

+10.8%*Underlying diluted earnings per share

+10.8%Dividend per share

* Underlying diluted earnings per share growth calculated on constant tax rate basis; 12.8% at actual tax rates.

To read the Annual Report online: http://ar2011.tescoplc.com/

TescO plc Annual Report and Financial statements 2011 1

Overview

Business review

Governance

Financial statements

Tesco in numbers

0.5bn US0.9bn Tesco Bank

44.6bn UK 11.0bn Asia10.6bn Europe

UnDeRlyinG pROFiT BeFORe TAx

3.8bn 3.7bn

TRADinG pROFiT

+8.1%

sAles

492,714

peOple

5,380

sTORes

10

103.6m sq ft

spAce

68% UK25% Asia, Europe, US7% Tesco Bank

51.8b

n

59.4b

n

62.5b

n

67.6bn

08 09 10 11

33.8% Asia1.6% US

35.4% UK29.2% Europe76

.9

88.6

95.2

103.6

08 09 10 11

444,127

468,50

8

472,09

4

492,714

08 09 10 11

3,751

4,33

2

4,83

6

5,38

0

08 09 10 11

67.6bn

2.8bn

3.1bn

3.4b

n

3.8b

n

08 09 10 11

2 TescO plc Annual Report and Financial statements 2011

Financial highlights

OVERVIEW

Richard Brasher has assumed the newly created role of ceO for the UK, as well as having responsibility for the Republic of Ireland, whilst David potts has become the first ceO of our growing Asia business. laurie McIlwee has taken on responsibility for Group strategy in addition to his role as cFO.

Andrew Higginson and lucy Neville-Rolfe will continue in their roles as ceO Retail services and executive Director (corporate and legal Affairs) respectively.

There have also been a few changes to the Non-executive members of the Board this year. Rodney chase cBe retired from his position as Deputy chairman and senior Independent Director in July. patrick cescau, who has served on the Board since February 2009, has replaced Rodney as senior Independent Director.

charles Allen cBe and Dr Harald einsmann, who had both served on the Tesco Board since February 1999, also retired in July and were replaced by stuart chambers and Gareth Bullock.

stuart, formerly ceO of NsG Group and pilkington plc, has replaced charles as chairman of the Remuneration committee. Gareth, former Group executive Director of standard chartered plc, has joined the Audit committee.

I would like to thank charles, Harald and Rodney for their excellent advice and important contributions over a combined 30 years service, and also formally welcome Gareth and stuart, who bring with them a wealth of international experience and new expertise in financial services, further adding to the overall strength of the Tesco Board.

DividendI am delighted to report that we have again increased our dividend for the 27th consecutive year. The Board has proposed a final dividend of 10.09p per share, taking the full-year dividend to 14.46p. This represents an increase of 10.8% on last years full-year dividend, which is in line with the growth in underlying diluted earnings per share at constant tax rates.

communityThis year, we donated over 64 million to charity again meeting our target to donate the equivalent of over 1% of our profits to charities and goodcauses.

Weve made further progress towards our goal of becoming a zero-carbon business by 2050. This year we have reduced emissions from our baseline portfolio of buildings by 7.7%.

Our peopleOur growth over the past year is a direct result of the dedication, passion and hard work of our people a team which is now over 492,000 strong. Im delighted that our share ownership incentive schemes are helping our staff to get their own personal stake in the business. This year 216,000 employees shared a record 105.5 million through our shares In success scheme. On behalf of the Board, I would like to thank all of our people for their ongoing commitment to providing the best possible service for our customers.

David Reid chairman

I am pleased to report another good set of results in what has been a challenging year in some of our markets.

After 14 years as ceO, Terry leahy announced his retirement in June and, as part of our long-term succession plan, philip clarke replaced him at the helm in March 2011.

Terry is undoubtedly one of the leading businessmen of his generation. Under his leadership we have more than quadrupled our sales and profits, expanded into 13 countries outside the UK and entered new markets such as online retailing and financial services. On behalf of everyone at Tesco and all our shareholders, it is a privilege to thank Terry for his unrivalled contribution to the success of the business.

There could be no better person to lead us going forward than philip clarke. philip has worked at Tesco throughout his career, spending many years in Retail and commercial. He joined the Tesco Board in 1998 and, as part of his role as Asia, europe and IT Director, has been at the heart of many of our most important developments and operational improvements in recent years, such as entry into china, Turkey and India and the introduction of the Tesco Hindustan service centre (Hsc) our global services arm.

I set the Nominations committee the objective of delivering a seamless succession and I am delighted with the outcome. The handover process from Terry to philip was very smooth. I have every confidence that under philips leadership, Tesco will go on to achieve even greater success in the future.

In order for the Tesco Board to better reflect the global nature of our business, provide more focus on key areas of performance and deliver on our immediate objectives, we made additional changes in March 2011. Tim Mason has become Deputy ceO and chief Marketing Officer in addition to his role as president and ceO Fresh & easy.


OVERVIEW

Overview

Business review

Governance


Chairmans statement

Building on our success

Im pleased to report that Tesco has once again achieved a good set of results with good sales, profit and earnings per share growth, despite challenging conditions in some of our markets.

I am particularly pleased with our progress on return on capital, where we have seen ROce grow strongly to 12.9%, representing an important first step towards our 2014/15 target of 14.6%, with further increases to come.

In the UK, we have an outstanding core business. It made progress in the year but some aspects of our performance can improve. stronger sales momentum here is a key priority and I am confident that the focus and energy our new UK leadership team is bringing to the business will see a return to form in the months ahead as Tesco tries to do its bit to help customers who face pressure on their householdbudgets.

The increasing scale and competitiveness of our international businesses are now driving strong growth in sales, market share, profits and returns, supported by the generally improving global economic environment. We have built some excellent springboards for future growth, and whilst there is still work to do, particularly in the United states, I am delighted with our performance in europe and Asia, where I expect further strong growth this year and beyond.

We have set six immediate team objectives against which we intend to be judged. First, keeping the UK strong and growing; second, we want to be outstanding internationally, not just successful; third, as the combination of stores and online becomes compelling for customers, we aim to become a multi-channel retailer wherever we trade; fourth, we will deliver on the potential of retailing services of which Tesco Bank is a big part; fifth, by applying Group skill and scale we will give our customers even more value and increase the

competitive advantage to our businesses; and finally, to deliver higher returns on capital employed for shareholders.

Also, as part of our commitment to communities, we want to widen our contribution from tackling climate change to broader aspects of sustainability.

Vision and strategy

Tesco is a business built around customers and staff, high-quality assets around the world and multiple opportunities for growth. My job is to build on this legacy for all our stakeholders. Going forward, there will mostly be continuity. We have a sound strategy, a strong team and the period of highest risk with the diversification of the business is now behind us. However, there will also be some changes, because we know that we can do some things better and because, as customers change, so must Tesco.

Importantly, there will be no change to the foundations of our business: our core purpose to create value for customers to earn their lifetime loyalty and our Values no one tries harder for customers and treat people how we like to be treated.

I have set out a new vision for the future of the business. I would like Tesco to be seen as the most highly valued business in the world. Valued not only by our customers, but also by the communities we serve, our staff and our shareholders.

We will win locally by applying our skills globally. The key word here is locally. seven years of running our businesses in Asia and europe has taught me that all retailing is local. But increasingly we are utilising the skill and scale of the Group to benefit the performance and competitiveness of each of our businesses around the world.

I have inherited a great legacy and I am really excited about the future. In the end of course, we know its all about performance; thats what matters and thats what we aim to deliver.


OVERVIEW

Chief Executives review

We will be a modern and innovative company. Well stay ahead of the curve, anticipating changes and adapting for the sake of our customers and staff.

We are, and we will remain a growth company. We will continue to pursue growth in all parts of the business in the UK, internationally, in services and across general merchandise, clothing and electricals.

More detail on our new vision can be found on pages 6 to 13.

To put this vision into practice, our strategy is evolving with a slight change in emphasis which builds on the success of our previous five-part strategy that has served us so well over the past 14 years. so our strategy will now have seven parts. Much of it will be familiar but with some important new additions around being a multi-channel retailer, creating highly valued brands and building our team:

To grow the UK core

To be an outstanding international retailer in stores and online

To be as strong in everything we sell as we are in food

To grow retail services in all our markets

To put our responsibilities to the communities we serve at the heart of what we do

To be a creator of highly valued brands

To build our team so that we create more value

More details on our strategy can be found on page 14.

Management structures

Weve made some changes to our management structures in order to equip the business to deliver our strategy and vision. This means ceOs for each of our main areas of focus the UK, Asia, services including Tesco Bank, europe and the Us being supported by the integrating functions such as IT and Finance to leverage the skill and scale of the Group.

The biggest part of this change was in the UK, which now has its own ceO and management board for the first time. This will bring more focus and energy to our largest business. Of course, structures dont manage companies, people do and Im confident that at all levels we have the very best team working hard to deliver the best shopping trip for our customers.

I have inherited a great legacy and I am really excited about the future. In the end of course, we know its all about performance; thats what matters and thats what we aim to deliver.

Philip Clarke Group chief executive


Overview

Business review

Governance


To be the most highly valued

MOsT HIGHly VAlUeD By:

TO Be The mOsT hiGhly VAlUeD By:

The customers we serve

Our core purpose is to create value for customers to earn their lifetime loyalty. This objective sits right at the heart of our business as one part of our Values No one tries harder for customers.

We know that we are already valued by our customers across our markets. In the UK, for example, we have the most loyal customer base of the major grocery retailers and in south Korea, Homeplus was awarded south Koreas Most Admired company award in October 2010.

The communities in which we operate

For Tesco to be considered a force for good, we must be a good neighbour and a responsible member of society. This is why community is part of our balanced scorecard approach to running our business and why each market has its own community plan, with promises relating to the environment, communities, responsible sourcing, healthy living and jobs and careers.

Our loyal and committed staff

We know that if we look after our staff, they will look after our customers. Work can be a large part of our lives so our people deserve an employer who cares. Thats why one of our Values is Treat people how we like to be treated.

We are committed to providing opportunities for our people to get on and turn their jobs into careers, and across all of our markets we offer a wide range of competitive benefits. In the Us, for example, we pay at least 75% of medical, dental, prescription and vision costs. 69% of employees across the Group who completed our annual staff survey said that they find their work interesting.

Our shareholders

As the owners of the business, its crucial that our shareholders value Tesco highly. shareholders want a good return on their investment and thats what we will continue to deliver for them. We have over 200,000 shareholders, including a large number of pension funds. We offer sustainable, profitable growth from a combination of a strong core UK business and exposure to rapidly growing emerging markets. Over the past decade our total shareholder return (TsR) has outperformed the FTse 100 by 53.2% and weve delivered dividend growth for the past 27 years the longest record of consecutive increase by any FTse 100 company.

69%of employees across the Group who completed our annual staff survey said that they find their work interesting

OUR VIsION

To learn more about our vision and strategy: http://ar2011.tescoplc.com/ businessreview/ourstrategy


Overview

Business review

Governance


Tesco Clubcard

All retailing is local. And clubcard is one of the ways in which we can be responsive to local customer needs. In addition to rewarding customers for their loyalty, clubcard provides us with insight from millions of customer transactions. From this we can develop tailored ranges, promotions and marketing by country or region in fact right down to the individual customer via their clubcard mailing.

The knowledge and expertise of operating clubcard was developed in the UK but has now been rolled out to a further 11 countries across the Group, with more members in Asia and europe than at home in the UK.

F&F

Weve been successful at exporting a number of our brands internationally, tailoring them to local trends, needs and price ranges.

F&F is a good example of how one of our brands has spread globally and won locally. Were bringing the benefits of our Group skill and scale to our buying and sourcing operations, helping to reduce costs and improve quality. In central europe for example, 95% of our clothing supplier base is the same as Ireland and the UK, even though to win in each market, we adapt our range to local trends, tastes and climates.

F&F is now in ten of our markets and is the market-leading clothing brand in the czech Republic, Hungary and slovakia. We also opened our first stand-alone F&F store in prague this year.

World-class training for national talent

We know that to be a successful international retailer we need to combine deep local knowledge with global experience this is why all of our international management teams are a mixture of nationals and people from our UK business.

In addition, the experience of working internationally helps us attract, retain and develop our people over a fifth of our directors are currently working outside their home country.

Our Academy supports the development of both operational expertise and leadership excellence. Management courses are developed based on global best practice and then used to train teams in each local market. Our first dedicated Academy centre will open in seoul serving Asia in July.

OUR VIsION



Overview

Business review

Governance


Online retailing

customers expect to be able to shop where and when they want as shopping habits have changed over the years weve changed too. As weve grown from a UK supermarket chain towards becoming an international multi-channel retailer weve continued to innovate every step of the way.

We were viewed as pioneers when we first launched an online grocery business 11 years ago. Its now the largest, most profitable business of its kind in the world.

Using their smartphones, our customers can now scan the barcode of grocery items, order online and have their shopping delivered to their home.

A leader in green retailing

As a global business we know that we can make a real difference in tackling climate change cutting our own emissions, working with suppliers and helping customers to cut their carbon footprint. We also understand that successful businesses need to be green to grow.

Our 2050 target to be a zero-carbon business will be achieved through improved efficiency and by generating our energy from renewable sources. Were making good progress over the past year we have reduced emissions from our baseline portfolio of buildings by 7.7%.

We have pledged to help customers cut their carbon footprints by 50% by 2020. We have worked with the carbon Trust and other stakeholders to develop a universal carbon footprint label which describes the emissions associated with each product. since January 2008, we have carbon labelled more than 500 everyday products in the UK and have started to label products in south Korea, helping our customers to make greener choices.

500+products carbon labelled since 2008

OUR VIsION



Overview

Business review

Governance


Business review

UK: an outstanding business

We have more than doubled sales and profit in our UK business over the last decade, cementing our position as clear market leader. yet there remain significant opportunities for further growth. The UK has the lowest grocery retail space per capita of any country in the eU; only 54% of shoppers are able to reach a Tesco extra within 15 minutes and we have only a small share of the convenience sector.

Beyond grocery weve developed a strong position in many other categories such as clothing, electricals and entertainment. But with a market share of around 4% in the non-food sector there is still plenty more to come.

124%UK sales growth over the last decade

International growth

More than two-thirds of our profit growth now comes from markets outside the UK. We opened our first international Tesco store in 1995; today were in 13 markets across europe, Asia and North America. 65% of our floorspace is now outside the UK, and our businesses in Asia and europe are collectively the same size as the whole of Tesco was 11 years ago. Weve built successful, diverse businesses across the world, yet the journey is only just beginning.

Weve already developed market-leading, highly profitable businesses in a number of countries. In south Korea, our largest international business, Homeplus, already generates 5 billion revenue. yet, if Homeplus were to grow to have the same proportion of the total retail market that Tesco has achieved in the UK, the business would be more than three times aslarge as it is today.

During our first decade of international expansion weve proved that we are able to develop profitable and market-leading businesses in many of our markets. Over the next decade, in addition to further expanding our established overseas businesses, we are focused on delivering growth in three of the worlds largest economies: china, India and the United states, which between them offer decades of future growth.

New services

customers trust Tesco and appreciate that we provide value, simplicity and good service. This is our approach with everything we sell and is the key to our success in following the customer into new areas such as banking and telecoms.

Tesco Bank in the UK now has over 6.5 million customer accounts and generates annual profits of 264 million. Weve made particularly good progress in credit cards. In February, one in eight of all Mastercard and Visa credit card transactions in the UK were made on a Tesco credit card. As we broaden our offer with mortgages launching this year we aim to become the best choice for all our customers banking needs.

We have also established a successful Telecoms business. Tesco Mobile now has over 2.5 million customers. By focusing on value and good service and through our 194 phone shops we are changing the way that customers buy phones, services and accessories.

OUR VIsION



Overview

Business review

Governance


The business review analyses the performance of the Tesco Group in the financial year ended 26 February 2011. It also explains other aspects of the Groups markets, results and operations, including strategy and risk management.

The Directors present their Annual Report to shareholders on the affairs of the Group and company, together with the audited financial statements of the company for the 52 weeks ended 26 February 2011.

some elements of the strategy remain unchanged. The goal to grow the core UK business is as relevant today as it was in 1997. The UK is the largest business in the Group and a key driver of sales and profit. There are many opportunities for further growth and so we will continue to grow the UK core.

Another of our original goals was to be a successful international retailer. In 1997, our international businesses generated 1.8% of the Groups profits. Today they represent 25% and were now either number one or number two in eight of our 13 markets outside the UK. so were already successful. Our next step is to be an outstanding international retailer in stores and online.

In 1997, we were largely a food retailer so we set ourselves the challenge of becoming as strong in non-food as in food. As our business has grown and we offer an ever wider variety of products to customers, the term non-food no longer does justice to all the products and services we sell. We now aim to be as strong in everything we sell as we are in food.

Our services businesses have come a long way since we first included in our strategy the desire to develop retailing services. Today these parts of Tesco generate 583 million profit, representing 16% of the Group total. To date this has been largely UK-focused, but as many of our international businesses have now established well-known brands in their local market, it is time to expand our ambitions and aim to grow retail services in all our markets.

In 2007, we added a fifth element to our strategy to underpin our commitment to communities and the environment. Weve updated this objective slightly by emphasising our responsibilities in these areas. Our goal is to put our responsibilities to the communities we serve at the heart of what we do.

There are two new strategic goals, both of which reflect the way that Tesco has developed over the last decade and our areas of emphasis for the future.

The first is to be a creator of highly valued brands. Our brand has evolved from a logo above a few stores in the UK to a multitude of store, product and service brands across the world. Building brands gives our business more meaning with our customers. On one level, this relates to our Retail brands such as the Tesco brand itself, but it also refers to our product brands such as F&F and Technika and our pillar brands such as Finest and Value.

Our final goal is to build our team so that we create more value. As our business continues to grow and diversify we need more leaders to run the many substantial business and support functions within the Group. Our leaders not only have an important role today, but also have a responsibility to help build a bigger and better team for the future.

Our progress in these areas is reviewed over the following pages.

Business review

Our strategy

In 1997, Tesco set out a strategy to grow the core business and diversify with new products and services in existing and new markets. This strategy enabled us to deliver strong, sustained growth over the past 14 years. Weve followed customers into large expanding markets in the UK such as financial services, general merchandise and telecoms and new markets abroad, initially in europe and Asia and more recently in the United states.

In order to reflect changing consumer needs and the increasingly global nature of our business weve evolved our strategy. The strategy now has seven parts and applies to our five business segments the UK, Asia, europe, the United states and Tesco Bank.


bUsINEss REVIEW

Our business

Our seven- part strategy

To grow the UK core

16

22


26

To be as strong in everything we sell as we are in food

30

To grow retail services in all our markets

34

To put our responsibilities to the communities we serve at the heart of what we do

38

To be a creator of highly valued brands

42

To build our team so that we create more value


Overview

Business review

Governance


To grow the UK core

In our market-leading UK business, we have delivered a solid performance by keeping our focus on the customer, providing them with great value, choice and service.

Clubcard

clubcard is our unique customer loyalty programme our way of saying thank you to our customers. It is now more popular than ever before, with active membership of over 15 million customers, compared to 13million at the start of 2008/9. customers who say they would prefer a Tesco to open in their area rather than a competitor store cite clubcard as the main reason.

clubcard continues to be a significant driver of growth for our business and ensures that our customer base continues to demonstrate considerably higher levels of loyalty than our competitors. For most of 2010, clubcard was the number one reason behind customers switching to us for their weekly shop.

customers have responded well to our new and up-weighted clubcard initiatives. Three million customers participated in the Big clubcard Voucher exchange promotions held in August and November, which provided new ways to get more value from vouchers through category-specific deals. We have seen 60% growth in Rewards through our partner Reward scheme as customers recognise that clubcard is about more than just earning money-off vouchers and that they can use points as currency in other areas of their lives.

44.6bnUK sales

2.5bnTrading profit

6.1%Trading margin

3.8%Trading profit up

5.5%Sales up

Introduction and market context

The UK economy is in recovery but consumers have been under pressure this year due to a combination of high petrol prices, food and utility inflation and, more recently, the VAT increase. As a result, were experiencing a period of unusually subdued industry growth. excluding petrol, like-for-like growth in the industry has been significantly lower than last year.

Against this backdrop, our UK business has delivered a solid performance. Total UK sales were 44.6 billion, growing by 5.5%, which was ahead of the market. UK trading profit increased by 3.8% or by 6.4% before the effects of our sale and leaseback programme; principally the additional rents incurred.


bUsINEss REVIEW

Growing the UK core

No.1reason for customers switching to Tesco

clUBcARD

clubcard continues to play an important role in earning customers loyalty. Weve continued to invest in Double points, we have introduced the Big clubcard Voucher exchange and we have expanded our partner Reward scheme.


Overview

Business review

Governance


ReAl FOOD

This year, we launched the Tesco Real food magazine. The monthly publication, which is available for free in our stores, provides customers with recipes, cooking tips, information on healthy eating and updates on new Tesco products. The magazine has become Britains largest food title with a circulation of 1.2 million.

Real food can be found online at www.tescorealfood.com. With over 1,000 recipes and a food blog, the site gets 2.2 million page views per month.

Weve also launched an innovative service for customers to receive great recipes via sms. customers are able to send a text message including two or three key ingredients and in return receive an automatic reply with a delicious recipe suggestion.

2,000Over 2,000 new and improved products

10mSelf-service transactions per week

stores

New space has continued to drive sales growth. Weve opened over 200 new stores in 2010/11 and have a strong opening programme for the coming year.

We have seen particularly strong growth in our convenience format, Tesco express, with over 150 new stores and have achieved significant share gain in the convenience sector. This growth follows our work to tailor the range and promotions in express to better suit the needs of our customers locally. Overall last year, we had 80 million more customer visits to our express stores than in 2009/10.

We have also refreshed or extended over 400 stores this year, receiving a great response from customers. For example, weve added 7,000 sq ft to Wembley extra, expanding our World Foods offer to meet better the needs of customers in the local area the store is outperforming by 16% and over three-quarters of customers have told us that it is greatly improved.

Range

Our customers tell us that quality is increasingly important to them, it is not simply about finding the cheapest product. We have stepped up our emphasis on quality, with accelerated product development, leading to the introduction of over 2,000 new and improved food products.

The increasing importance of quality for customers is also supported by the strong performance of our Finest range, which has outpaced the growth of other areas of our food range, with a 6.3% increase in sales this year.

Many of our customers want to buy locally sourced products to support their local communities. We are always looking to expand our network of good local suppliers and to support them in building capacity to grow their businesses and supply us at a national level.

We have five dedicated regional buying offices throughout the UK and in 2010/11 we increased sales of local products to 1 billion, up from 850 million in 2009/10. Tesco is the first UK retailer to launch a website dedicated to local foods, at www.tesco.com/local.

Weve also worked more closely with farmers and growers to increase the amount of British produce in-store. This year, for example, we sold over 40% more British apples and pears.

Price

We remain focused on delivering the best value to all customers. The launch of essential savings in May was an investment in lower prices on the everyday products which our customers buy. We have introduced more multi-buys into the promotion programme to help customers save money. We also launched our price check initiative this year. price check enables customers to check the price of individual products and the total price of their shopping online. When we compare our customers baskets with Asdas prices, nearly 80 per cent are the same price or cheaper in Tesco than they would be in Asda. Together these initiatives have helped us to maintain our leading position in a highly competitive market and to encourage customers to switch to Tesco throughout the year.


bUsINEss REVIEW

Growing the UK core

1,000+Recipes on www.tescorealfood.com

Availability

We have maintained high levels of availability this year through a number of programmes, from better promotional forecasting through to improved processes for monitoring availability in our stores. Our customers are benefiting from this work and have noticed the improvements customer satisfaction with availability is at a record high up 7% from last year and 13% from the year before.

We have had great success with our automated weather forecasting technology which accurately adjusts store orders and deliveries based on customers shopping habits in different weather conditions in 14 individual regions nationwide. We have also delivered a comprehensive plan to improve availability in our express convenience stores, resulting in a 25% reduction in the number of out-of-stock items in the evenings.

service

We work continually to improve service for our customers. We have trained over 80,000 staff this year in every little Helps skills for checkouts, supporting them to deliver helpful, friendly and efficient service. We also know how important it is for our customers to be able to choose the checkout that is right for them, so we are working to create the ideal configuration in each of our stores based on the local customer profile.

This year, we have continued to use technology to help deliver great service. Our self-service checkouts provide customers with a quick and easy option and currently account for over ten million transactions per week. Our trials of scan as you shop, which uses hand-held technology, have gone well too.

sTAFF TRAininG

We have trained 80,000 staff this year in every little helps skills for checkouts.

eVeRy cOmmenT helps

Our every comment helps initiative encourages customers to give instant feedback on their shopping trip including both the customer service they receive and the range of products we offer. customers are able to share their feedback via text or email.

Over 20,000 of the comments that we have received have been compliments about the service which our customers have received. This is testament to the hard work and commitment of our teams in-store.

All of the comments have helped us to understand whats important to our customers and identify where we can do better. We are putting plans into action based on the feedback we receive so that we can do even more to improve our customers shopping experience.

19

Overview

Business review

Governance


Tesco UK: a growth business

Delivering for customers

Our success begins with delivering a great shopping trip in every store. Behind our every little Helps philosophy lie world-class systems and processes for property, buying, distribution, ordering, store operations and marketing.

We also have the widest range of any food retailer including the leading own label range. Finest and Value are the two largest food brands in the UK bigger than coca-cola each with more than 1 billion of sales per year.

1.1bn

1.1bn

0.7bn

1.0bn

Coca-Cola

Warbu

rton

s

0.5bn

Walkers Crisps

Tes

co Fines

t

Tes

co Value

LEADING UK FOOD BRANDS

Source: Nielsen and Tesco.

UK sales 2010

Through clubcard we are able to reward our customers loyalty and at the same time use the insight from the data gathered to better understand our customers needs so that we can keep improving the shopping trip.

By delivering for customers every day we have built the most loyal customer base of any of the major food retailers:

14.5%

15.9%

18.5%

29.7%

Wm M

orrison

J Sainsbu

ry

Tesco

Asda

CUSTOMER LOYALTY vs COMPETITORS

Source: Competitor data; Tesco analysis.

Proportion of a retailers customers who do more than 50% of their shopping with a single retailer.

People

Our people work incredibly hard every day to serve our customers and give them the best shopping trip. 90% of our store staff tell us that they are committed to doing their best when working at Tesco and 71% say they enjoy working for Tesco.

80% of our store staff tell us they are satisfied with the benefits they receive, which is reflective of our market-leading level of pay.

Climate change

As a retail business, we know that we can make a real difference in tackling climate change cutting our own emissions, working with suppliers and helping customers to cut their carbon footprint.

In our UK business, we have led the work on climate change and for the second year running, we have reduced our absolute emissions this year by 5% despite space growing by 7% as well as significantly reducing emissions from our baseline portfolio of buildings.

Outstanding financial performance

We operate a balanced scorecard approach to managing the business, based on the steering Wheel segments: customer; community; Operations; people; and Finance. In order to achieve sustainable profitable growth over the long term we must deliver on all these priorities.

This approach means that we have delivered consistently strong financial performance each year, which has led to remarkable performance when looking over a number of years showing the cumulative effect of consistent growth. The chart below shows the consistency and speed with which we have grown relative to our major UK peers.

Tesco in the UK is an outstanding business. We are clear market leader in food retail with the broadest customer appeal, widest range of formats, market-leading systems and processes and the worlds leading customer loyalty programme clubcard.

We are the largest private employer in the UK, offering market-leading pay and rewards to our staff, and were a leader in tackling climate change. We also generate outstanding financial performance with the highest sales densities, profit margin and return on capital of any company in the sector.


bUsINEss REVIEW

Growing the UK core

Rev

enue

bn

00/0198/99 02/03 06/0704/05 08/09 10/1196/97

40

35

25

20

30

15

10

5

Asda J Sainsbury TescoWm Morrison

GROWTH vs COMPETITORS

Source: Tesco and Deutsche Bank Research (including estimates for 10/11).

We have also consistently delivered superior financial performance to our peers in terms of profit margin and return on capital, which in turn has helped us invest in our customer offer and in further expansion new stores, new businesses (e.g. banking and telecoms), new channels (e.g tesco.com) and new countries.

EBIT

DA

R m

argi

n %

02/0301/02 03/04 04/05 06/0705/06 08/0907/08 09/10 10/1100/01

12

10

8

6

4

2

J Sainsbury Tesco UKWm Morrison

EBITDAR* vs COMPETITORS

Source: Tesco and Deutsche Bank Research (including estimates for 10/11).* EBITDAR defined as statutory profit before interest, tax, depreciation, amortisation and rent.Tesco EBITDAR excludes property profits.

J Sainsbury Tesco UKWm Morrison

RO

CE

%

02/0301/02 03/04 04/05 06/0705/06 08/0907/08 09/10 10/1100/01

20

15

10

5

0

-5

UK ROCE vs COMPETITORS

Source: Tesco and Deutsche Bank Research (including estimates for 10/11).Tesco ROCE excludes the positive impact of the sale and leaseback programme.

Future growth

The UK offers significant opportunities for growth for Tesco in grocery, in non-food categories and in services.

The UK grocery market is mature, but far from saturated. The UK has the lowest grocery space per capita of any country in the EU and only about a third of that of the United States.

0.25

0.21

0.29

0.28

Spa

in

Pola

nd

0.34

Ger

man

y

0.35

0.35

Ital

y

Fran

ce

0.58

US

UK

Net

herl

ands

sq m per capita

GROCERY RETAIL SPACE PER CAPITA

Source: Verdict Research (space per capita), Economist Intelligence Unit (population data).

An important indicator of the scope for future growth of grocery space in the UK is that when new stores open the impact on existing stores is minimal. We track very closely every store opened in the UK by Tesco and our competitors and the impact of these new stores on Tescos sales has remained consistently below 1% of our total sales for many years. The performance of our own mature stores opened in recent years is exceeding business plan forecasts and our profit margin and return on capital in the UK continue to strengthen.

There is significant opportunity and demand for Tesco to grow its store network for example, only 54% of UK shoppers are able to reach a Tesco Extra within 15 minutes.

Convenience stores form another important segment of the grocery market. Traditionally a fragmented market, Tesco was the first of the major retailers to develop a convenience format on a national scale with Tesco Express. We now have 1,285 Express stores but this still represents only a small market share in the convenience segment and we have many years of future growth.

In addition to food (and other grocery items such as household and toiletries), Tesco has developed a strong offer in categories such as electricals, clothing and entertainment. In these new general merchandise areas we only have around a 4% market share in a large fragmented market. With a large and loyal customer base, the leading store network and a strong online platform, we have a tremendous springboard from which to grow our market positions in these segments.

We have also followed our customers into services such as banking, insurance and telecoms, building on our brand reputation for value, simplicity and great service. We have built successful businesses, such as Tesco Bank and Tesco Mobile, which are already making a significant contribution to sales and profits. There remains enormous potential for future growth in these areas, through expanding our range of products (particularly in banking with mortgages and current accounts) and by increasing our penetration of Tescos 15 million Clubcard customers.

TESCO PLC Annual Report and Financial Statements 2011 21

Overview

Business review

Governance


NB: some versions of the printed Annual Report show an incorrect version of this chart.

Overall, our businesses across Asia, europe and the United states have had a strong year, with improvements in sales, profits and returns in most markets.


Most of our markets have seen steady economic improvement over the past year and in some cases particularly in Asia sharp improvement. countries hardest hit in the downturn in particular Hungary, Ireland and the United states have been slower to recover, although even there we are now seeing signs of improvement.

A particularly encouraging feature of our performance in Asia and europe has been excellent market share growth, with many of our businesses seeing strong growth in both customer numbers and like-for-like sales.

We have resumed a faster pace of new space opening now that economic conditions are generally improving. We opened 6.5m sq ft of gross new space in 2010/11, compared with 5.1m sq ft in 2009/10 and plan to open a further 8.4m sq ft during the current year.

Asia

Our businesses in Asia have delivered another good performance leading to increases in sales and profits supported by improving like-for-like sales growth, a useful contribution from new stores and further benefits from our acquisition in south Korea in 2008.

As economies in Asia recover, we are seeing improving sales trends. Our performance was helped by favourable exchange rate movements but nevertheless profits grew by almost 18% at constant currency rates.

Our businesses in south Korea and Thailand opened 56 and 119 stores respectively and delivered excellent sales and profit growth during the year as these economies rebounded sharply from recession.


11.0bnAsia sales

10.6bnEurope sales

502mUS sales

527mEurope trading profit

570mAsia trading profit


bUsINEss REVIEW

To be an outstanding international retailer

21%sales in Thailand

up 21%

ThAilAnD

Tesco lotus, our business in Thailand, is one of our most successful international businesses with strong profitability and the highest return on capital of all our overseas markets. We now operate 782 stores with 11m sq ft of space, having added a further 119 stores in the year.


Overview

Business review

Governance


AnshAn

in October, we opened our fourth lifespace mall our largest so far in Anshan, china. Over 600,000 customers flow through our four lifespace malls each week. We plan to have up to ten malls open by the end of the year.

In China, we are pushing ahead with our expansion plans, opening a further 19 stores in the year, including five express stores. Our investments in equipping the business for faster growth, combined with our store roll-out being slower than planned, meant that we made a small overall loss in the year.

After a sharp contraction in 2009 the economy in Malaysia has also recovered well over the past year. Our business has delivered very good sales and profit growth driven by continued investment for customers in prices, promotions and clubcard.

In Japan, falling supermarket industry sales are providing a challenging background for our operations and the business continued to make modest losses. We were one of the first businesses to respond to the devastating earthquake and tsunami in Japan in March 2011 with a corporate donation of 50,000 through our partnership with the Red cross.

Our early plans in India are continuing to progress well. Our local management team is helping our franchise partner, Trent, to develop its star Bazaar hypermarket operation.

Our Asian markets offer an exciting long-term growth opportunity and will be a key focus for our future international expansion, both in our established markets and in china. We have continued to invest through the downturn to ensure that we are in an even stronger position as the economic recovery continues.

This year we plan to open 5.1m sq ft of new selling area. We have also continued to make good progress in developing strong brands in our leading Asian businesses with further expansion of clubcard and our retail services businesses.

Asia results 2010/11

mActual rates

% growthconstant rates

% growth

Asia sales 11,023 21.5 9.7

Asia revenue* 10,278 21.4 9.6

Asia trading profit 570 29.5 17.5Trading margin (trading profit/revenue) 5.55% 35bp 34bp

hOmeplUs A WORlD-clAss BUsiness

homeplus in south Korea is our largest business outside the UK, with revenue of 5 billion, making the business larger than many FTse 100 companies.

We entered south Korea through a partnership with samsung and opened our first two hypermarkets in 1999. Today we are a sophisticated multi-format and moving to multi-channel retailer with 354 stores and we employ over 23,000 people. in just a decade we have grown from two shops to become the second largest retailer in the country and were closing in on the number one position.

And there is plenty more to come with significant potential for growth. The organised modern

retail trade in south Korea still represents a relatively small proportion of the total market just 54% of total retail sales. We are already the market leader in the rapidly growing grocery home shopping sector and have recently launched our general merchandise website. Were also using our admired brand, strong store network and large customer base to develop our retail services offer.

Together with delivering outstanding financial performance, we are aiming to be the most respected corporate brand in south Korea and weve already been awarded south Koreas most Admired company award.

We have continued to invest through the downturn to ensure that we are in an even stronger position as the economic recovery continues.

21.5%Asia sales growth

* Revenue excludes VAT and the impact of IFRIc 13.


bUsINEss REVIEW

To be an outstanding international retailer

Europe

Our operations in europe have delivered record results and strong growth in sales, profits and margins. Recovering economies generally helped but key to this performance was the striking improvement in the competitiveness of our local businesses, which won market share rapidly.

We have invested for customers through lower prices, sharper promotions and clubcard, funded by strong productivity and substantial early benefits of our pan-european sourcing. The resulting strong sales growth has driven an improvement in profitability and margins.

sales growth varied across the region but all markets saw sharply improved like-for-like sales growth compared with 2009/10, with a good contribution also coming from new space.

In Ireland, like-for-like growth in the year was significantly stronger, and although it was broadly stable during the second half, the two-year trend has continued to improve. Despite a decline in consumer confidence resulting from political and economic uncertainty and the continued fall in disposable income, our business has continued its strong relative performance with impressive market share gains.

Our business in Poland had another good year, with good growth in sales and profits despite a period of subdued consumer sentiment following the smolensk tragedy.

In Hungary economic conditions and consumer confidence remain challenging but despite this our business made solid progress.

Growth in the Czech Republic has been supported by the successful launch of clubcard with over 10% of the population already enrolled.

A particularly strong performance in slovakia with double-digit like-for-like sales growth has led to a further increase in our market share over the last year, further consolidating our market leadership.

As the economy in Turkey has continued to recover, weve resumed a faster rate of expansion opening 21 new stores, including ten hypermarkets helping to support strong sales growth.

With the improving economic outlook we are stepping up the rate of new store opening. some 2.6m sq ft of new space was opened in the year, with a programme to add a further 2.9m sq ft of new space across the region in 2011/12.

Europe results 2010/11

mActual rates


% growth

Europe sales 10,558 5.6 7.4

Europe revenue* 9,192 5.4 7.1

Europe trading profit 527 11.2 13.7Trading margin (trading profit/revenue) 5.73% 30bp 42bp

United states

customer feedback at Fresh & easy remains excellent and strong growth in customer numbers is driving steady sales improvement in each store.

Although there is clearly some way to go, with these key elements moving in the right direction, we plan to accelerate the rate of new store openings to around 50 in the current year. With the improvements in our distribution centre and manufacturing campus productivity, we now expect to break-even with around 300 stores rather than the 400 we originally anticipated.

Our losses increased in the year as a consequence of the initial costs of integrating our two dedicated fresh food suppliers, 2 sisters and Wild Rocket Foods, and exchange rate movements. These businesses have now been fully integrated with our existing kitchen operations, with substantially improved financial performance, product quality and service levels.

We expect losses to reduce sharply in the current year as strong growth in like-for-like sales continues and improved store operating ratios start to deliver shop-door profitability. We have a strong plan for the business to break-even towards the end of the 2012/13 financial year.

Us results 2010/11

mActual rates


% growth

Us sales 502 41.8 38.1

Us revenue* 495 41.8 38.1

Us trading profit/(loss) (186) (12.7) (9.7)

exTRAs in eUROpe

Weve remodelled and converted eight extra stores across central and eastern europe with an average uplift of 16%. see page 29 for more detail.

5.6%Europe sales growth




Overview

Business review

Governance


To be as strong in everything we sell as we are in foodWeve continued to grow sales and expand our offer in general merchandise, clothing and electricals and we have a great opportunity to do much more.


Our general merchandise, clothing and electrical businesses have continued to grow, despite the challenges of weak demand in some of our important markets. We have seen some strong key category and market share performances, which have helped compensate for the effects of cautious consumer spending in these more discretionary areas. In order to align with our new structures, we will going forward define non-food as general merchandise, clothing and electricals (excluding health & beauty and household). Overall Group sales in this category rose 8.8% during the year to 10.3 billion.

In the UK, high petrol prices and increases in VAT have had a significant impact on discretionary consumer spending. Many high street retailers have suffered from declining sales and have issued profit warnings. Tesco has fared better and maintained market share but we havent been spared the impact of subdued demand. Inthe UK, general merchandise, clothing and electricals sales grew by 0.4% to 5.3 billion. General merchandise sales growth was affected by a smaller component of extension selling space in this years new space programme, with extensions providing just 10% of new space.

In our international markets the picture varies considerably by country. Most of our markets in europe and Asia saw strong growth in general merchandise as the economic recovery took hold during the year, although a number of markets such as Ireland and Hungary remain challenging.

10.3bnGroup sales

1stIn July, in Prague we opened our first stand-alone F&F store

5.3bnUK sales

Fastestwww.tesco.com/clothing: the fastest growing online retailer in volume terms in the clothing, footwear and accessories market

8.8%Group sales growth


bUsINEss REVIEW

To be strong in everything we sell

clOThinG

clothing is a key element of our customer offer in central europe and we have had another pleasing year with 9% sales growth. We are now clothing market leader in the czech Republic, hungary and slovakia.

9%clothing sales growth in

central europe


Overview

Business review

Governance


23,000Number of products available through Tesco Direct

1stFirst UK supermarket to stock the Apple iPad and Amazon Kindle

TescO Tech sUppORT

Tesco Tech support teams are now in over 200 of our largest UK stores providing our customers with expert advice on their electrical purchases.

UK

Improving the performance of general merchandise in the UK is one of our key priorities. Our aim is to offer our customers the same great quality, price and range in our general merchandise offer as they would find with their Tesco grocery shop. The focus is on delivering in three key areas with the aim of improving the general merchandise shopping trip for our customers:

investing in making the ranges more aspirational;

enhancing the shopping experience with specialist advice; and

developing our multi-channel capability.

Investing in making the ranges more aspirationalWe have invested in and expanded our general merchandise ranges to provide greater appeal to our customers. Our offer is already good but there is much more we can do in particular by offering more aspirational products, not just everyday basics.

In electricals, we were the first UK supermarket to stock the Apple ipad and the Amazon Kindle two of the most sought-after technology products on the market. Keeping in tune with changes in technology and responding quickly to offer our customers the latest electrical innovations is central to our strategy and to building our reputation as a leading retailer in everything we sell.

Enhancing the shopping experience with specialist adviceWe are investing in our people so that we are able to support and advise our customers when they are making big ticket purchases such as TVs or mobile phones. For example we have 194 phone shops offering customers impartial advice on phone packages and accessories.

In over 200 of our largest stores, we have Tesco Tech support teams, made up of staff specifically trained to help customers with technical queries on electrical items from TVs to cameras and satellite navigation systems. The additional advice helps customers get the right product for their individual needs, supporting a reduction in product returns. Alongside our in-store teams, we have a free electrical helpline for our customers, manned by fully trained engineers, and a dedicated Tech support website.

Developing our multi-channel capabilityOur multi-channel approach makes it easy for our customers to shop in a way that suits them online, in-store or from catalogues. customers can browse in a catalogue, order online and then collect in-store or they can order in-store and have the goods delivered to their home. This year, over 40% of Tesco Direct electrical purchases have been made online and picked up in-store through our click and collect service.

Weve listened to our customers and adapted by expanding our range. We have increased the number of products available through Tesco Direct to around 23,000, but we need to do much more in order to compete with the wider ranges offered by other leading online retailers.

In 2009/10, we launched our clothing site at www.tesco.com/clothing. The website, which combines our F&F ranges alongside some other well-known brands, has been extremely popular with customers. We are currently the fastest growing online retailer in the clothing, footwear and accessories market.

inTeRnATiOnAl sOURcinG

in order to get the best priced and highest quality products for our customers, we source many food, clothing and general merchandise goods globally and buy many products directly from producers and manufacturers.

Through our Group sourcing operations, headquartered in hong Kong (above), we can ensure:

better products: confidence in where and how they are made;

cheaper costs: the cheapest source of products for all countries;

competitive advantage: on range and quality versus market competitors; and

knowledge sharing: best practice in how we source, buy, make and move products.

This year, we sourced directly more than 4 billion worth of food and general merchandise products at retail value.


bUsINEss REVIEW

strong in everything we sell

Europe

In europe, general merchandise, clothing and electricals sales were strong, reflecting an overall improving consumer background and a strengthening offer in our stores.

clothing in central europe had a successful year with a 9% year-on- year growth in total sales. We are now the clothing market leader in the czech Republic, Hungary and slovakia. Building on the success of the F&F brand, we have introduced our F&F Blue and F&F Basics sub-brands to provide our customers with a greater range to choose from. Our first stand-alone F&F store also opened successfully in prague last year, highlighting the appeal of the brand in the czech Republic.

In central europe, our trio of mid-market My department stores showcase our general merchandise, clothing and electricals ranges including well-known brands such as levis, FcUK and Disney. Our flagship My Narodni store in prague and our stores located in liberec and Bratislava are traditional multi-floor department stores with open layouts and a full range of product categories at multiple price points. In the year, all stores made strong progress in like-for-like sales growth with our brands such as F&F and Go cook competing well against more established luxury brands.

Our F&F clothing brand launched in south Korea and Thailand this year and the early response from customers has been excellent.

spORTs shOps

Our sports multishops in south Korea have increased sales of sporting goods in these stores by over 60% with great customer feedback.

Asia

We have seen strong general merchandise sales growth in our Asian businesses which are predominantly hypermarket operations. We saw particularly pleasing increases in electrical products, with double-digit growth in Thailand and over 30% in china.

Our F&F clothing brand launched in south Korea and Thailand this year and the early response from customers has been excellent a very good example of the skill and scale of the Tesco Group being applied across our global network.

last year we opened our first three sports Multishops in Homeplus stores in south Korea. These innovative sports zones are designed to meet growing customer needs for sporting goods, in a one-stop shopping environment.

sports Multishop presents our customers with a wide range of high- quality branded sporting goods, a specialised bicycle shop, a golf shop and over ten sports and outdoor brand shops, such as Nike and Adidas, in a single 15,000 sq ft location.

sports Multishop has increased sales of sporting goods in these stores by over 60% with high customer penetration. We will open sports Multishop in ten more stores this year, with plans for further roll-out thereafter.

GOinG The exTRA mile in eUROpe

This year we began the remodelling and conversion of some of our older hypermarkets across central and eastern europe.

Weve listened to our customers and are making a number of enhancements to our stores to improve the shopping trip. Weve extended our range by introducing over 5,000 products, introduced product-specialist employees to improve service, and provided a better shopping environment through the introduction of conforming layout, fixtures and fittings.

Were also adding many of the complementary services such as phone shop, Opticians and pharmacy to provide our customers with a wider range of general merchandise products. Weve achieved very strong sales improvements across the eight extras completed so far with an average uplift of 16%. These refits are delivering particularly marked uplifts in general merchandise categories, including clothing and electricals.


Overview

Business review

Governance


To grow retail services in all our marketsThis year weve made progress in our retail services businesses: tesco.com, Tesco Bank, Telecoms and dunnhumby our consumer research business. Weve been investing for the customer and laying the foundations for future growth.

4.0bnRetail services sales

15%Online businesses sales growth

30%dunnhumbys sales and profits up over 30%

6.5m+Tesco Bank customer accounts

2.5m+Tesco Mobile customers

Introduction

In July 2008 when we announced our intention to take full ownership of Tesco Bank, we set a target to grow the profitability of our retail services businesses from just under 400 million in 2007/8 to 1 billion.

This year, we have made creditable progress in moving towards this target. We have attracted new customers, grown sales and profit and continued to invest particularly in infrastructure to equip the business for further growth.

We want all of our customers, across all of our markets, to have access to our financial, telecoms and online services. We can do this by applying Group skill and scale and building on the knowledge which we have acquired from our retail services experience in the UK, Ireland and south Korea.

In 2010/11, total retail services sales were 4.0 billion, up 12% on 2009/10 and trading profit grew to 583 million*.

Tesco bank

Despite a challenging year in the wider banking sector, and as it completes its transition to full separation from The Royal Bank of scotland (RBs), Tesco Bank continues to perform well.

The business has made good progress with its systems re-platforming, which will complete as planned in 2011. We opened our new banking and insurance service centres in Glasgow and Newcastle in October 2010. All new motor and home insurance business, including renewal policies sold since then have, as planned, been written on new systems. We also launched successfully our first new product on our own banking platforms the Fixed Rate saver last autumn. This has been followed by our recent innovative retail bond. Both of these initiatives exceeded plan and serve to diversify our funding base and increase the proportion of long-term funding available to the Bank.

The Bank has made progress in key areas with savings strongly up, good growth in the loan book with improved margins and an excellent year in credit cards, with the transaction value up 20% on 2009/10. The car insurance book has also resumed growth, having plateaued before the change of control, despite the inevitable challenges of migration. * Retail services profit comprises profit from Telecoms, tesco.com, dunnhumby

and Tesco Bank, including UK store ATM income.


bUsINEss REVIEW

Growing retail services

TescO TelecOms

We now have 194 phone shops in stores across the UK and this year, we have begun to open phone shops in our refreshed extra stores in central europe. Our phone shops provide our customers with support and advice so that they can choose the best option for them.

194phone shops in the UK


Overview

Business review

Governance


customer account numbers grew well in active credit cards by 11%, personal loans by 17% and motor insurance by 8%. Our Fixed Rate saver product significantly exceeded expectations and we ended the year with a balance of 397 million, 40% higher than planned, and we now have one, two and three-year options available for customers. The range of products available for customers will be broadened further this year with the planned launch of mortgages.

The Banks bad debt position has significantly improved year-on-year, with the charge to the income statement 26% lower, despite the growth in lending, as credit card and loan defaults reduced, helped by good management of bad debt and the quality of our new business. This excellent progress on bad debt has also resulted in an increase in the release of the fair value provisions we made in the Group balance sheet on acquisition. Based on a lower than expected level of claims, we have also released some of our provisions for customer claims against payment protection insurance policies.

These strong elements of the Banks performance mean that we have been able to offset the substantial extra provisions made in the year related to bodily injury claims in our motor insurance business a trend affecting the whole industry and the costs of migration, yet still deliver increased trading profit.

The baseline profitability of the Bank before provisions movements and the adjustments required under acquisition accounting continues to improve steadily, whilst absorbing the higher costs of migration away from RBs. We expect further improvements in the baseline profitability in 2011/12.

Our core Tier 1 capital ratio has risen substantially to a healthy 15.9% at the year end. The strong growth in the Banks deposit base means that we have a significant excess of deposits over loans, as we build out balance sheet capacity ahead of the planned launch of mortgages.

tesco.com

Our online businesses, including online grocery and Tesco Direct, had another strong year. Taking into account our operations in south Korea and Ireland, total sales grew by 15%. Our UK operations continued to grow well, with double-digit growth in grocery and a further 30% increase at Tesco Direct.

We have worked consistently over the past year to innovate for customers in our online businesses so that we can provide them with a better online shopping trip. Our work on upgrading our tesco.com website has enabled us to launch an iphone grocery app, which has been very popular accounting for over 12% of customer traffic to the tesco.com site.

We know that our customers lead busy lives and love the convenience of our home grocery delivery service, so this year we have invested to make life even easier for customers. In the UK, we have successfully launched one hour delivery slots in london and we have been trialling a new click and collect service for groceries, which allows people to order online and collect their items from a store.

so that we can support our growth momentum, we have increased our UK-wide delivery capacity by adding an extra 350 vans to our fleet and we are currently trialling a new scheduling system to increase the efficiency of our vans.

Tesco Direct provides a platform to extend the reach of our general merchandise, clothing and electricals offer through the internet and catalogues. This year, Direct has achieved strong growth of 30%, including clothing online, which represents solid progress against a backdrop of continued pressure on household budgets through 2010 and early 2011.

Throughout the year, we have made significant investments in our stores to improve the multi-channel shopping offer which is available through Direct. For example, customers can order online and pick up in-store or order in-store and have their delivery dropped off at their door. We have added 30 new Direct desks and 89 collection points and we now have 11 Order and collect stores.

In south Korea, we have launched a general merchandise website to complement the current grocery site. The new website launched in January. Our online business has performed well in Ireland with a 15% increase in sales and 12.5% increase in orders. In the next year, we are launching online shopping sites in the czech Republic and poland.

12%12% of customer traffic to tesco.com site coming via our grocery app

2m+Our international calling card has generated sales of over 2 million since its launch

TescO cReDiT cARD

in February, one in eight of all mastercard and Visa credit card transactions in the UK were made on a Tesco credit card.


bUsINEss REVIEW

Growing retail services

Tesco Telecoms

Our Telecoms business grew well during the year, maintaining strong market share, driven primarily by the growth of Tesco Mobile. In 2010 Tesco Mobile was one of the fastest growing UK mobile networks, growing its customer base by 24% to over 2.5 million.

customers have responded positively to an increase in the number of mobile handsets we are offering, including the latest smartphones from Android to HTcmodels.

In 2010, we entered the international calling card market. The market has recently been investigated by OFcOM and Tesco was one of the top performing service providers praised for its value, clarity and customer service. Our international calling card has generated sales of over 2 million since launching and around 16,000 cards are sold in-store every week.

Our Tesco Mobile joint ventures with O2 in Ireland and slovakia are performing well. Both businesses are growing strongly and moved into profit for the first time this year.

dunnhumby

dunnhumby has had a very strong year, increasing sales and profits by over 30% with excellent growth in the UK supplier business and from its overseas joint ventures with retailers.

Following the acquisition of the final 10% of the business in the first half of the year, dunnhumby is now a wholly owned subsidiary of Tesco.

In south Korea, we have launched a general merchandise website to complement the current grocery site.

hOmeplUs

homeplus is the number one grocery home shopping provider in south Korea, delivering just under 1.5 million orders last year.

TescO DiRecT

in november 2010, Tesco Direct launched a new mobile website allowing customers to easily browse for and buy general merchandise items on their smartphone.

DUnnhUmBy

dunnhumby was founded in 1989 by edwina Dunn and clive humby with the intention of embedding customer insight into the way organisations work. By analysing data from over 340 million people in 25 countries, dunnhumby helps companies to put their customers at the centre of every business decision.

dunnhumby uses the insight generated by data they gather to allow companies to improve customers experiences of shopping in their stores, branding and marketing. They work with companies to help them tailor their offer to the needs and wants of their customers.

dunnhumbys work with some of the worlds biggest retailers and brands has demonstrated that companies which deliver value to customers through personalisation earn customers loyalty.

This strategic approach of putting the customer first in business improves their clients like-for-like sales and profit margins or, put simply, creates measurable value.

employing more than 1,500 people in 30 offices in europe, Asia and the Americas, dunnhumby serves a prestigious list of companies including Kelloggs, The Kroger co., mller, procter & Gamble, coca-cola and mars. dunnhumbys work has also extended beyond the grocery sector to include partnerships with macys, shell and the panera Bread company.

dunnhumby has worked with Tesco since the launch of clubcard in the UK in 1995 and now works across the 12 markets where we have clubcard.


Overview

Business review

Governance


To put our responsibilities to the communities we serve at the heart of what we doWe work hard to be a good neighbour in the communities around our stores and provide a leadership role on the environment. Building a long-term sustainable business is crucial to our future success.

Introduction

community is an essential part of our long-term strategy. We are committed to tackling the issues that matter to our communities and society at large.

We have five community promises which we have developed by listening closely to what our customers and staff expect from us. They are:

Buying and selling our products responsibly;

caring for the environment;

providing customers with healthy choices;

Actively supporting local communities; and

creating good jobs and careers.

each year, we set KpIs in each of the 13 countries where we operate stores so that we can measure our progress on projects which sit alongside each of these commitments.

pledging to become a zero-carbon business by 2050, for example, means that we can play our part in tackling climate change. climate change matters to our customers wherever we operate and by cutting our own emissions, we can make a real difference. We are also working with other businesses to transform the consumer goods industry by tackling carbon hot spots in the global supply chain. At the same time, we are helping our customers to cut their carbon footprints by 50% by 2020.

64m+ Donated to local charities and good causes

100Community Fairs in the UK

100%Nutritional labelling on eligible own-brand food lines

3Three new zero-carbon stores in the Czech Republic and the UK

7.7%Emissions reduction from our baseline portfolio of buildings

To read our corporate Responsibility Report online

www.tescoplc.com/ corporate-responsibility/


bUsINEss REVIEW

Community at the heart of what we do

schOOls OF exTenDeD eDUcATiOn

in south Korea, we celebrated the opening of our 100th school of extended ed

tesco annual report 2011

Documents

group financial statements

group statement of changes

group cash flow statement

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directors report

tata group

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